"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.
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
B is incorrect. It was determined with no discounting of future benefits, resulting in an incorrect impairment charge: 28.4 – 3 × 7 = 7.4.
C is incorrect. This is a non-cash item and does not affect cash from operations.
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