Reading 35: Analysis of Inventories - LOS d ～ Q13-14 black, border, balance, auto

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13.Selected financial data from Krandall, Inc.’s balance sheet for the year ended December 31 was as follows (in $):

Cash	$1,100,000	Accounts Payable	$400,000
Accounts Receivable	300,000	Deferred Tax Liability	700,000
Inventory	2,400,000	Long-term Debt	8,200,000
Property, Plant & Eq.	8,000,000	Common Stock	1,000,000
Total Assets	11,800,000	Retained Earnings	1,500,000
LIFO Reserve at Jan. 1	600,000	Total Liabilities & Equity	11,800,000
LIFO Reserve at Dec. 31	900,000

Krandall uses the last in, first out (LIFO) inventory cost flow assumption. The tax rate is 40 percent. If Krandall used first in, first out (FIFO) instead of LIFO and paid any additional tax due, its assets-to-equity ratio would be closest to:

A)   4.06

B)   3.63

C)   3.73

D)   4.18

 

14.Selected information from Newcomb, Inc.’s financial statements for the year ended December 31, 2004 included the following (in $):

Cash	70,000		Accounts Payable	90,000
Accounts Receivable	140,000		Deferred Tax Liability	100,000
Inventory	460,000		Long-term Debt	520,000
Property, Plant & Equip.	1,200,000		Common Stock	600,000
Total Assets	1,870,000		Retained Earnings	360,000
			Total Liabilities & Equity	1,870,000
Interest Expense	60,000
Net Income	220,000
LIFO Reserve at Jan. 1	185,000
LIFO Reserve at Dec. 31	250,000

Newcomb uses the last in, first out (LIFO) inventory cost flow assumption.  The tax rate is 40 percent.  If Newcomb changed from LIFO to first in, first out (FIFO) for 2004 and average total capital was $1,700,000 for both the LIFO and FIFO computations, the return on total capital would:

A)   decrease from 16.5 to 12.6 percent.

B)   remain unchanged at 16.5 percent.

C)   increase from 16.5 to 18.8 percent.

D)   increase from 16.5 to 14.2 percent.

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答案和详解如下：

13.Selected financial data from Krandall, Inc.’s balance sheet for the year ended December 31 was as follows (in $):

Cash	$1,100,000	Accounts Payable	$400,000
Accounts Receivable	300,000	Deferred Tax Liability	700,000
Inventory	2,400,000	Long-term Debt	8,200,000
Property, Plant & Eq.	8,000,000	Common Stock	1,000,000
Total Assets	11,800,000	Retained Earnings	1,500,000
LIFO Reserve at Jan. 1	600,000	Total Liabilities & Equity	11,800,000
LIFO Reserve at Dec. 31	900,000

Krandall uses the last in, first out (LIFO) inventory cost flow assumption. The tax rate is 40 percent. If Krandall used first in, first out (FIFO) instead of LIFO and paid any additional tax due, its assets-to-equity ratio would be closest to:

A)   4.06

B)   3.63

C)   3.73

D)   4.18

The correct answer was A)   

With FIFO instead of LIFO:

  Inventory would be higher by $900,000, the amount of the ending LIFO reserve.

  Cumulative pretax income would also be higher by $900,000, so taxes paid would be higher by 0.40($900,000) = $360,000. Therefore cash would be lower by $360,000.

  Cumulative retained earnings would be higher by (1 - 0.40)($900,000) = $540,000.

So assets under FIFO would be $11,800,000 + $900,000 - $360,000 = $12,340,000 and equity would be $1,000,000 + $1,500,000 + $540,000 = $3,040,000. The assets-to-equity ratio would be $12,340,000/$3,040,000 = 4.06.

 

14.Selected information from Newcomb, Inc.’s financial statements for the year ended December 31, 2004 included the following (in $):

Cash	70,000		Accounts Payable	90,000
Accounts Receivable	140,000		Deferred Tax Liability	100,000
Inventory	460,000		Long-term Debt	520,000
Property, Plant & Equip.	1,200,000		Common Stock	600,000
Total Assets	1,870,000		Retained Earnings	360,000
			Total Liabilities & Equity	1,870,000
Interest Expense	60,000
Net Income	220,000
LIFO Reserve at Jan. 1	185,000
LIFO Reserve at Dec. 31	250,000

Newcomb uses the last in, first out (LIFO) inventory cost flow assumption.  The tax rate is 40 percent.  If Newcomb changed from LIFO to first in, first out (FIFO) for 2004 and average total capital was $1,700,000 for both the LIFO and FIFO computations, the return on total capital would:

A)   decrease from 16.5 to 12.6 percent.

B)   remain unchanged at 16.5 percent.

C)   increase from 16.5 to 18.8 percent.

D)   increase from 16.5 to 14.2 percent.

The correct answer was C)

The return on total capital under LIFO ((net income + interest expense) / average total capital) was (( $220,000 + $60,000) / $1,700,000) =) 16.5 percent. Under FIFO, net income is increased by the increase in the LIFO reserve during the year multiplied by (1 – tax rate). FIFO return on total capital is (($220,000 + (($250,000 - $185,000) (1 – 0.40)) + $60,000) / $1,700,000 =) 18.8 percent.