Quiz 6 Problems –

Attempt 1

1. Assume that Barber Co. uses the LIFO inventory costing method for both tax and
financial reporting purposes. The balance sheet reports inventories at $297 million.
Then, in its footnotes, the company reports that inventories would have been $327
million had the company used the FIFO method. 

The difference between these two numbers ($30 million) is referred to as:
a. LIFO Reserve
2. Employee severance costs, as part of board-approved restructuring plans, are reported
in the income statement even if the actual payment for these costs occurs in subsequent
periods.
a. True
3. Impairment of long-term assets is determined by comparing the sum of the present value
of the asset’s expected future cash flows to the asset’s net book value.
a. False
4. The 2016 financial statements for BNSF Railway report the following
information: 
Year ended December 31, 2016 2015
(In millions)    
Revenues $19,829 $21,967
Property and equipment, net 61,250 59,510
Total assets 84,122 81,703

The 2016 property, plant and equipment turnover is:

a. Answer:
Property, plant and equipment turnover is 0.328 times
b. Explanation:
The Asset Turnover is calculated as: Net Revenue/Average total Assets
* Average total property, plant and equipment is:
Beginning Assets + Closing Assets/2
Average property, plant and equipment is: 59,510+61,250/2 = 60,380
*Revenue 2016 = 19,829
The turnover ratio 2016: 19,829/60,380 = 0.328 times
5. In general, in a period of falling prices, LIFO produces higher gross profits than
FIFO.
a. True
6. One difference between straight-line and double-declining-balance depreciation
methods is that:
 a. Double-declining-balance method will fully depreceiate the asset more
quickly. INCORRECT
7. CarMax Inc. reports sales of $15,875,118 thousand and cost of sales of
$13,691,824 thousand for the year ended February 28, 2017. 

The gross profit for the year is:

a. Beginning Inventory (A) + Inventory additions this period (B) – Ending
Inventory (C) = Cost of Goods Sold (D)
b. A + B – C = D
c. ALSO: Sales – COGS = Gross Profit
d. 15,875,118 – 13,691,824 = 2,183,294 (Gross Profit)
e. Gross Profit Margin % = Gross Profit/Sales
f. GPM = 2,183,294 / 15,875,118 = .1375
g. ANSWER: A, $2,183,294 thousand
8. Increasing inventory turnover rate will improve profitability.
a. FALSE
9. Central Supply purchased a new printer for $67,500. The printer is expected to operate
for nine (9) years, after which it will be sold for salvage value (estimated to be $6,750). 

How much is the first year’s depreciation expense if the company uses the double-
declining-balance method?
a. 1/9 = 11% straight line depreciation rate
b. 2x SL rate = DDB depreciation rate, so, 11%x2 = 22%
c. Depreciation Base
i. Net Book value =cost – accumulated depreciation
ii. NBV = 67,500 – 14,850
iii. NBV = 52,650 for 1 year
d. ANSWER: None of the above. Deprec. Expense is $14,850. INCORRECT
10. Dow Chemical Corporation plans to build a laboratory dedicated to a special project. The
company will not use the laboratory after the project is finished. Under GAAP, this
laboratory should be:
a. ANSWER: expensed in the current year as all single projects with no alternative
use, R&D costs are otherwise are capitalized and depreciated over its useful life
Attempt 2

1. Aiello, Inc. had the following inventory in fiscal 2016. The company uses the
FIFO method of accounting for inventory.

Beginning Inventory, January 1, 2016: 130 units @ $15.00 

Purchase 200 units @ $18.00 
Purchase 50 units @ $13.50 
Purchase 110 units @ $15.75 
Ending Inventory, December 31, 2016: 120 units

The company’s cost of goods sold for fiscal 2016 is:

a. A. $6,090.00
B. $6,045.00
C. $6,157.50
D. $5,305.75
E. None of the above

b. Units Sold = (130 + 200 + 50 + 110) – 120 = 370 units

c. COGS under FIFO = (130*15) + (200*18) + (40*13.50) = 6,090
d. COGS under LIFO = (110*15.75) + (50*13.50)+(200*18) + (10*15) = 6,157.5
2. CarMax Inc. reports sales of $15,875,118 thousand and cost of sales of $13,691,824
thousand for the year ended February 28, 2017. 

The gross profit for the year is:

A. $2,183,294 thousand
B. $1,464,362 thousand
C. 86.2%
D. 13.8%
E. There is not enough information to determine gross profit.

3. The 2016 financial statement of Willamette Valley Vineyards reported Net

revenues of $19,425,412 and Cost of goods sold of $7,204,884. Note 3 to the
financial statements reported that Inventories consisted of: 
  2016 2015
Winemaking and packaging $     817,836 $     690,292
materials
Work-in-progress 6,634,014 6,058,701
Finished goods 4,518,806 3,883,469
Total inventories $11,970,656 $10,632,462

The inventory turnover for 2016 was:

a.
A. 0.57
B. 0.64
 C. 0.59
D. 1.71
E. None of the above
b. Inventory Turnover rate = COGS / Avg. Inventory OR Sales/Inventory

SO: 7,204,884 / (11,970,656 + 10,632,462 / 2)

Inventory Turnover Rate = 7,204,884 / 11,301,559 = 0.6375

4. Companies using LIFO are required to disclose the amount at which inventory would
have been reported had it used FIFO. Similarly, companies using FIFO are required to
disclose what their inventory would have been if the company had used LIFO.
a. False?
i. Answer: False

Rationale: Only the first sentence is true. The disclosure of the LIFO
reserve is required for those companies using LIFO inventory costing.
This disclosure allows analysts to adjust the balance sheet and income
statement for LIFO effects when comparing LIFO and FIFO companies.

5. Acadia, Inc. recorded restructuring charges of $235,542 thousand during fiscal 2017
related entirely to anticipated employee separation payments. Acadia, Inc. had never
before incurred restructuring charges. At the end of the year, the company’s balance
sheet included a restructuring accrual of $29,643 thousand. 

The cash flow effect of Acadia’s restructuring during fiscal 2017 was:

a. A. $205,899 thousand
b. B. $235,542 thousand
c. C. $265,185 thousand
d. D. $ 29,643 thousand
e. E. None of the above
6. One difference between straight-line and double-declining-balance depreciation methods
is that:
a. Straight-line method will fully depreciate the asset more quickly.
b. Double-declining-balance method will fully depreciate the asset more quickly.
c. Income taxes paid will be lower under the double-declining-balance method.
d. Losses on disposal will be lower under the straight-line method.
e. None of the above.
7. An asset is impaired when the asset's carrying value is:
a. Greater than the sum of discounted expected cash flows
b. Less than the sum of discounted expected cash flows
c. Less than the sum of undiscounted expected cash flows
d. Greater than the sum of undiscounted expected cash flows
 e. None of the above
8. InterTech Corporation recorded pretax restructuring charges of $1,033.5 million in 2017.
The charges consisted of asset write-downs of $681 million, costs associated with exit or
disposal activities of $99 million, and employee severance costs of $253.5 million. The
company paid $108 million cash to settle these restructuring charges during the year
(2017). 

At year end, the restructuring accrual associated with these charges was:
a. $1,033.5 million
b. $ 326.0 million
c. $ 253.5 million
d. $ 244.5 million
e. There is not enough information to determine the amount.
9. In order to estimate depreciation expense using the double-declining-balance method,
managers must estimate the asset's useful life and its salvage value.
a. False
10. Other than raw materials and manufacturing overhead, what is the third component of
inventories for manufacturing companies?
a. Direct Labor
Attempt 3

1. Impairment of long-term assets is determined by comparing the sum of the present value
of the asset’s expected future cash flows to the asset’s net book value.
a. FALSE
2. An asset is impaired when the asset's carrying value is:
a. Greater than the sum of discounted expected cash flows
b. Less than the sum of discounted expected cash flows
c. Less than the sum of undiscounted expected cash flows
d. Greater than the sum of undiscounted expected cash flows
e. None of the above
3. In general, in a period of falling prices, LIFO produces higher gross profits than FIFO.
a. TRUE
4. Companies using LIFO are required to disclose the amount at which inventory would
have been reported had it used FIFO. Similarly, companies using FIFO are required to
disclose what their inventory would have been if the company had used LIFO.
a. FALSE
5. R&D expense is treated as an operating expense, not a capital expenditure, unless the
R&D assets acquired have an alternative future use.
a. True, under GAAP R&D costs are expensed unless the R&D assets have alternative
future uses.
6. LIFO inventory costing yields more accurate reporting of the inventory balance on the
balance sheet.
a. False. LIFO assumes that the most recently purchased goods are sold, thus the
cost of the oldest items remain in the inventory balance. Hence, the balance
sheet reports inventories at less current costs.
7. One difference between straight-line and double-declining-balance depreciation methods
is that:
a. Straight-line method will fully depreciate the asset more quickly.
b. Double-declining-balance method will fully depreciate the asset more quickly.
c. Income taxes paid will be lower under the double-declining-balance method.
d. Losses on disposal will be lower under the straight-line method.
e. None of the above.
8. The 2016 financial statements for BNSF Railway report the following
information: 
Year ended December 31, 2016 2015
(In millions)    
Revenues $19,829 $21,967
Property and equipment, net 61,250 59,510
Total assets 84,122 81,703

The 2016 property, plant and equipment turnover is:

a. 0.33
9. InterTech Corporation recorded pretax restructuring charges of $1,033.5 million in 2017.
The charges consisted of asset write-downs of $681 million, costs associated with exit or
disposal activities of $99 million, and employee severance costs of $253.5 million. The
company paid $108 million cash to settle these restructuring charges during the year
(2017). 

At year end, the restructuring accrual associated with these charges was:
a. $1,033.5 million
b. $ 326.0 million
c. $ 253.5 million
d. $ 244.5 million
e. There is not enough information to determine the amount.
10. Aiello, Inc. had the following inventory in fiscal 2016. The company uses the
FIFO method of accounting for inventory.

Beginning Inventory, January 1, 2016: 130 units @ $15.00 

Purchase 200 units @ $18.00 
Purchase 50 units @ $13.50 
Purchase 110 units @ $15.75 
Ending Inventory, December 31, 2016: 120 units

The company’s cost of goods sold for fiscal 2016 is:

a. A. $6,090.00
B. $6,045.00
C. $6,157.50
D. $5,305.75
E. None of the above

b. Units Sold = (130 + 200 + 50 + 110) – 120 = 370 units

c. COGS under FIFO = (130*15) + (200*18) + (40*13.50) = 6,090
d. COGS under LIFO = (110*15.75) + (50*13.50)+(200*18) + (10*15) = 6,157.5