Question #11 - Reading 13 Integration of Financial Statement Analysis Techniques

Reading: Reading 13 Integration of Financial Statement Analysis Techniques

PDF File: Reading 13 Integration of Financial Statement Analysis Techniques.pdf

Page: 6

Status: Incorrect

Correct Answer: B

Your Answer: B

Shared Context

- Based on her calculations of accruals, Howard believes that NetPhoto has a higher accruals ratio over the recent past compared with SnapPrints. If both companies have recently had extreme earnings, Howard would most likely conclude that: A) NetPhoto’s income will revert to its mean more quickly than SnapPrints’. B) SnapPrints’ income will revert to its mean more quickly than NetPhoto’s. C) SnapPrints’ income will revert to its mean, but NetPhoto’s income will not.

Question

In reviewing the footnotes to NetPhoto's financial statements, Howard discovers that the firm has engaged in a LIFO liquidation. The most likely effects on the financial statements (compared to no LIFO liquidation) are:

Answer Choices:

A. a decrease in COGS and an increase in the net profit margin

B. a decrease in inventory turnover and an increase in the gross profit margin

C. an increase in the gross profit margin and an increase in days of inventory

Explanation

A LIFO liquidation refers to slowing the purchase of inventory items so that older lower costs are used to calculate COGS. Compared to following regular purchase policies, this will reduce COGS, reduce inventory, and artificially increase gross and net margins. Since the percentage decrease in inventory is likely greater than the percentage decrease in COGS, the inventory turnover ratio is likely increased, rather than decreased, by a LIFO liquidation.

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