"Financial Report":Statement of American GAAP

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Questions 1:

Greene Corporation uses the last-in, first-out (LIFO) inventory method, but most of the other companies in Greene’s industry use first-in, first-out (FIFO).To best compare Greene’s financial statements with its competitors’, an analyst would make which of the following adjustments to Greene’s ending inventory? It should be:

A 、increased by the LIFO reserve.

B、 decreased by the LIFO reserve.

C、 increased by the change in the LIFO reserve for that period.

Questions 2:

The following information is available for a company that prepares its financial statements in accordance with US GAAP:

● It has production facilities with a net book value of $28.4 million.

● Recently, several other companies have entered the market, and the company now estimates that it will be able to generate cash flows of only $3 million per year for the next seven years with its facilities.

● The firm has a cost of capital of 10%.

Reflecting these recent events related to its production facilities, the company’s financial statements will most likely report (in millions) a:

A、 $13.8 impairment loss on the income statement.

B、 $7.4 reduction in the balance sheet carrying amount.

C、 $13.8 reduction in operating cash flows.

View answer resolution

【Answer to question 1】A

【analysis】

A is correct. The analyst should add the ending balance in the LIFO reserve to the LIFO inventory to equal the ending balance for inventory on a FIFO basis: LIFO reserve = Inventory (FIFO) – Inventory (LIFO).

B is incorrect. Inventory (FIFO) = Inventory (LIFO) + LIFO Reserve

C is incorrect. Inventory (FIFO) = Inventory (LIFO) + LIFO Reserve

【Answer to question 2】A

【analysis】

Financial Report:Statement of American GAAP