11.Selected information from Jenner, Inc.’s financial statements for the year ended December 31 included the following (in $):

Jenner uses the last in, first out (LIFO) inventory cost flow assumption. If Jenner changed from LIFO to first in, first out (FIFO) in 2001, return on total equity would:

A)   increase from 20.0 to 21.1 percent.

B)   decrease from 20.0 to 18.3 percent.

C)   increase from 20.0 to 25.0 percent.

D)   increase from 20.0 to 23.0 percent.

12.Selected information from Leeward Company’s financial statements for the year ended December 31 is as follows (in $):

Leeward uses the last in, first out (LIFO) inventory cost flow assumption.  The tax rate is 40 percent.  Considering the impact of taxes, if Leeward changed from LIFO to first in, first out (FIFO), the total debt-to-total equity ratio will:

A)   increase from 1.25 to 1.32.

B)   decrease from 1.25 to 1.16.

C)   remain unchanged at 1.25.

D)   decrease from 1.25 to 1.20.

[此贴子已经被作者于2008-4-14 12:02:29编辑过]

答案和详解如下：

11.Selected information from Jenner, Inc.’s financial statements for the year ended December 31 included the following (in $):

Cash	$200,000	Accounts Payable	$300,000
Accounts Receivable	300,000	Deferred Tax Liability	600,000
Inventory	1,500,000	Long-term Debt	8,100,000
Property, Plant & Equip.	11,000,000	Common Stock	2,200,000
Total Assets	13,000,000	Retained Earnings	1,800,000
LIFO Reserve at Jan. 1	400,000	Total Liabilities & Equity	$13,000,000
LIFO Reserve at Dec. 31	600,000
Net Income
(after 40 percent tax rate)	800,000

Jenner uses the last in, first out (LIFO) inventory cost flow assumption. If Jenner changed from LIFO to first in, first out (FIFO) in 2001, return on total equity would:

A)   increase from 20.0 to 21.1 percent.

B)   decrease from 20.0 to 18.3 percent.

C)   increase from 20.0 to 25.0 percent.

D)   increase from 20.0 to 23.0 percent.

The correct answer was A)

Return on total equity (net income / total equity) was ($800,000 / ($2,200,000 + $1,800,000) =) 20 percent. Under FIFO, net income increases by the increase in the LIFO reserve multiplied by (1 – tax rate). FIFO net income for 2001 was ($800,000 + ($600,000 – $400,000) (1 – 0.40) = ) $920,000. Total equity increases by the amount of accumulated FIFO profits that are added to retained earnings which is calculated by multiplying the amount of the ending LIFO reserve by (1 – tax rate) for an increase of (($600,000) * (1 – 0.40) =) $360,000. Total equity is ($2,200,000 + $1,800,000 + $360,000 =) $4,360,000. FIFO return on total equity is ($920,000 / $4,360,000 =) 21.1 percent.

12.Selected information from Leeward Company’s financial statements for the year ended December 31 is as follows (in $):

Cash	3,000,000		Accounts Payable	1,800,000
Accounts Receivable	3,400,000		Deferred Tax Liability	1,200,000
Inventory	6,300,000		Long-term Debt	12,500,000
Property, Plant & Eq.	15,200,000		Common Stock	2,000,000
Total Assets	27,900,000		Retained Earnings	10,400,000
LIFO Reserve Jan. 1	1,600,000		Total Liab. & Equity	27,900,000
LIFO Reserve Dec. 31	2,100,000

Leeward uses the last in, first out (LIFO) inventory cost flow assumption.  The tax rate is 40 percent.  Considering the impact of taxes, if Leeward changed from LIFO to first in, first out (FIFO), the total debt-to-total equity ratio will:

A)   increase from 1.25 to 1.32.

B)   decrease from 1.25 to 1.16.

C)   remain unchanged at 1.25.

D)   decrease from 1.25 to 1.20.

The correct answer was D)

Total debt to total equity under LIFO is ($1,800,000 + $1,200,000 + $12,500,000) / ($2,000,000 + $10,400,000) =) 1.25. If Leeward uses FIFO, on the asset side, Inventory will increase by the amount of the ending LIFO reserve ($2,100,000). On the liabilities and equity side, Deferred Tax Liability will increase by the ending LIFO reserve times the tax rate ($2,100,000 * 0.4 =) $840,000. Retained Earnings will increase by the ending LIFO reserve times (1 – tax rate), which is (($2,100,000) (1 – 0.4) =) $1,260,000. Leeward’s total debt to total equity ratio under FIFO will be ($1,800,000 + $1,200,000 + $840,000 + $12,500,000) / (($2,000,000 + $10,400,000 + $1,260,000) =) 1.20.