Selected information from Leeward Company’s financial statements for the year ended December 31, 2001, 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. 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) |
decrease from 1.25 to 1.20. |
|
D) |
remain unchanged at 1.25. |
C
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. |
发表于 2006-4-27 16:39
| 
