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21. Nan Chen, CFA, is comparing a firm with two of its industry competitors. She obtains the following financial excerpts from the firm’s financial statements, as well as the inventory turnover ratio on two of its competitors. Firm Balance sheet data     Inventory (FIFO basis) $45,000     LIFO reserve (unchanged from year before) 10,000 Income statement data:     Sales, gross $105,000     Returns and allowances 5,000     COGS 50,000 Comparative competitors’ financial ratios Company 1 Company 2     Inventory turnover 1.90 1.05 The firm uses the LIFO inventory costing method under U.S.GAAP, which is consistent with its industry competitors. What conclusions should the analyst reach when comparing the firm’s inventory turnover ratio to those of ties competitors? A. Outperformed both competitors. B. Outperformed Company 1 only. C. Outperformed Company 2 only.

Ans: C. To calculate inventory, the FIFO inventory value must be adjusted to a FIFO value to be consistent with the other firms. With a $10,000 LIFO reserve that means that the FIFO inventory value is $10,000 more than a LIFO value inventory. Inventory turnover = = = = 1.43 which is less than 1.90 (#1) and more than 1.05 (#2). Note: if the LIFO reserve had changed the COGS would have to also be adjusted by adding the increase, or subtractive the decrease, from COGS to adjust the FIFO COGS to LIFO.