Answers 1 e false 2 e true 3 e true 4 e false 5 m

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Answers 1. E; False 2. E; True 3. E; True 4. E; False 5 M; False 6 M; True 7 M; True 8 M; False 9 M; False 10 E; False 11 M; True 12 M; False 13 M; True 14 M; False 15 M; True 16 M; True 17 M; True 18 M; False 19 M; False 20 M; True 21 M; False 22 M; False 23 M; True 24 M; False 25 M; True 26 M; False 27. E; (b) 28. E; (a) 29. M; (b) 050609 7 09-Inventories.doc
30 M; (a) 31 M; (a) 32 M; (a) 33 M; (c) 34 M; (a) 35 M; (a) 36 E; (c) 37 M; (a) 38 M; (b) 39 M; (a) 40 M; (d) 41 M; (a) 42 M; (c) 43 M; (a) 44 M; (b) 45 M; (d) 46 M; (b) 47 M; (d) 48 M; (a) 49 M; (b) 50 M; (a) 51 M; (a) 52 M; (c) 53 M; (a) 54 M; (d) 55 M; (c) 56 M; (d) 57 M; (a) 58 M; (d) 59 M; (b) 60 M; (b) 61 M; (c) 62 M; (d) 63 M; (c) 64 M; (a) 65 M; (a) 66 M; (b) 67 M; (b) 68 M; (b) 69 M; (b) 70 M; (c) 71 M; (b) 72 M; (c) Explanation to Selected Multiple-Choice Questions 39 Ending LIFO inventory: 400 @ \$3.10 = \$ 1,240 120 @ 3.20 = 384\$ 1,62440 LIFO cost of goods sold: 280 @ \$3.25 = \$ 910 1,280 @ 3.20 = 4,096\$ 5,00641 FIFO cost of goods sold: 400 @ \$3.10 = \$ 1,240 1,160 @ 3.20 = 3,712\$ 4,95242 Ending FIFO inventory: 280 @ \$3.25 = \$ 910 240 @ 3.20 = 768\$ 1,67843 FIFO inventory \$ 875,000 LIFO inventory – 750,000\$ 75,000 higher with FIFO 47 LIFO inventory \$ 450,000 + LIFO reserve 34,000FIFO inventory \$ 484,000 48 LIFO cost of goods sold \$ 197,500 – increase in LIFO reserve (5,000)estimated FIFO COGS \$ 192,500 49 LIFO cost of goods sold \$ 100,000 + decrease in LIFO reserve 30,000estimated FIFO COGS \$ 130,000 56 2007:Cost of goods sold understated \$ 6,000 RE over \$ 6,000 050609 8 09-Inventories.doc
Insurance understated (4,000)RE over 4,000Retained earnings overstated \$ 10,00057 2006: Cost of goods sold understated \$ 16,000 RE over \$ 16,000 Insurance overstated 12,000RE under (12,000)Retained earnings overstated \$ 4,0002007: Cost of goods sold overstated\$ 16,000 RE under \$ (16,000) Cost of goods sold understated 6,000 RE over 6,000 Insurance understated (4,000)RE over 4,000Retained earnings overstated \$ (6,000)Total retained earnings understated \$ 2,00063 Net real value (ceiling) = selling price \$50 – cost of completion \$1 = \$48 64 Floor = selling price \$60 – cost of completion \$4 – normal profit \$14 = \$42 65 Cost = \$20 market = \$24 (replacement \$24,ceiling \$28, floor \$22) LCM = \$20 66 Cost = \$52 market = \$42 (replacement \$40, ceiling \$56, floor \$42) LCM = \$42 67 Market = \$24 (replacement \$24,ceiling \$28, floor \$22) 68 Base year inventory \$125,000 x 1.00 = \$ 125,000 Increase for 2005 (base year prices) 6,250 x 1.10= 6,875Ending dollar value LIFO inventory \$ 131,87569 End inventory \$250,000/price index 1.05 = inventory at base year price = \$ 238,095 Base year inventory \$200,000 x 1.00 = \$ 200,000 Increase for Year 2 (base year prices) 38,095 x1.05 = 40,000Ending dollar value LIFO inventory \$ 240,00070 End inventory \$296,000/price index 1.08 = inventory at base year price = \$ 274,074 Base year inventory \$200,000 x 1.00 = \$ 200,000 Year 2 layer (base year prices) 38,095 x1.05 = 40,000 Increase for Year 3 (base year prices) 35,979 x1.08 = 38,857Ending dollar value LIFO inventory \$ 278,85771 End inventory \$286,000/price index 1.10 = inventory at base year price = \$ 260,000 Base year inventory \$200,000 (1.00 = \$ 200,000 Year 2 layer (base year prices) 38,095 (1.05 = 40,000 Year 3 layer (base year prices) 21,905 (1.08 = 23,657Ending dollar value LIFO inventory \$ 263,65773. Solution: 1 \$315 million 2 Reported cost of goods sold + decrease in LIFO reserve = 2,021 + 30 = 2,051 3 LIFO reserve (tax rate = 154 ×.35 = 53.9 4 LIFO reserve ((1 – tax rate) = 154 ×.65 = 100.1 decrease 5 Reported cost of goods sold/Average FIFO inventory = 2,021/[(469 +544)/2] = 3.99 74 Solution: 1 \$96.5 million 2 Net income would be overstated by the amount of the error net of tax. The fundamental accounting equation can be used to show the effect. Asset (incr) = Liabilities + Stockholders’ Equity (incr) 3 Conservatism 4 LIFO reserve (tax rate = 47.5 ×.35 = 16.63 5 The 4.1 should be viewed as transitory income. Consequently, cost of goods sold will be higher in future periods holding sales constant. Also, the resulting gross margin for 1999 is not comparable to 1998 or future periods. Investors should incorporate this information into their projections when valuing Steel-case. 6 (Reported cost of goods sold + pretax LIFO liquidation)/average FIFO inven-tory = (1,753 + 4.1/.65)/[(144 + 157.4)/2] = 11.67 050609 9 09-Inventories.doc